One would think that the more prestigious and well-known a company is, the more incentive they would have to ensure all of their business practices are above board. Surprisingly, however, a new study finds the opposite may hold true in most cases.
Researchers from Washington State University report that large Fortune 500 companies with strong growth profiles are generally more likely to “cook the books” than smaller companies struggling to survive. In other words, the bigger the corporation, the higher the chance of financial fraud.
“Prestigious companies, those that are household names, were actually more prone to engage in financial fraud, which was very surprising,” says lead study author Jennifer Schwartz, WSU sociologist. “We thought it would be companies that were struggling financially, that were nearing bankruptcy, but it was quite the opposite. It was the companies that thought they should be doing better than they were, the ones with strong growth imperatives–those were the firms that were most likely to cheat.”
Over 250 US-based public corporations that had been named as financial securities fraud offenders by the Securities and Exchange Commission between 2005-2013 were examined for this project. Then, all of those dishonest firms were compared to a control sampling of corporations not named as fraudsters.
That process led to the emergence of an unmistakable trend. Corporations showing at least one of the three following traits were much more likely to be named as fraudulent by the SEC: a listing on the Fortune 500, being traded on the New York Stock Exchange, and strong growth expectations.
Companies enjoying “Fortune 500 status” were represented on the fraudulent list nearly four times more often than in the control non-fraud group. Similarly, firms listed on the NYSE were over-represented in the fraud category by a nearly two-to-one margin in comparison to the control group.
Interestingly, corporations in which the CEO also serves as chair of the board were found to be more likely to commit fraud.
The word “criminal” usually conjures up images of balaclava-wearing thugs robbing a bank or snatching purses on the street. The acts discussed in this study are no less criminal, and in many cases, far more people end up being negatively affected.
“What these companies were doing was essentially fudging the numbers, lying to investors, other companies and the SEC,” Schwartz explains. “Eventually, you have to make up for the money that was lost, that really never existed, so shareholders lose money, people lose retirement plans, people lose jobs. It’s very, very damaging.”
Specifically, study authors named dishonest accounting standards, general misrepresentation of a company’s financials, and flat-out lying or providing incomplete information to investors as common examples of how such fraudulent corporations attempt to manipulate the market in their favor.
“We need to look more at corporate leadership arrangements, and the responsibility of individuals in creating the culture of the company itself,” Schwartz concludes. “How can leaders encourage companies to be more successful not only in terms of profit or growth but also in terms of corporate social responsibility?”
These cultural issues in the financial sector run far deeper than the occasional rogue accountant or greedy CEO. The corporate world is in dire need of a culture shift prioritizing more than just profit. That being said, just as Professor Schwartz concludes, it’s up to today’s decision-makers and leaders to begin changing that culture.
The full study can be found here, published in Justice Quarterly.